FSA unveils restructuring tied to initial stock offering.

Financial Security Assurance yesterday filed a registration statement for 12 million shares of common stock, confirming longstanding rumors that an initial public offering was in the works.

The statement, filed with the Securities and Exchange Commission, also details a major corporate restructuring that will accompany the stock sale, in a move designed to segregate FSA's commercial real estate exposure from the new, publicly owned company. The company has paid out $110 million over the past several years on commercial real estate claims.

"As a further step in FSA's strategy and as a condition to the closing of the offerings, the company will enter into a restructuring which will significantly reduce FSA's risk of loss from the commercial mortgage transactions previously insured by FSA," the municipal bond insurer's SEC filing says.

Because of FSA's heavy losses in commercial real estate, the firm abandoned the sector in 1990.

Of the $34.8 billion of bonds insured by the company as of June 30, 1993, $2.5 billion, or 7.2%, were in the commercial real estate sector. About $600 million of that total is reinsured.

Under the restructuring, FSA will reinsure $1.54 billion of the remaining $1.9 billion through a new company to be established by FSA's current owners, U S West Capital Corp. and the Tokio Marine and Fire Insurance Co. The new reinsurer will be called Commercial Reinsurance Co.

The move significantly reduces the likelihood that future commercial real estate claims, if any are incurred, would affect FSA as dramatically as they have in the past. According to the filing statement, the company previously could expect to pay about 77% of a commercial real estate claim, with the rest passed on to reinsurers. When the restructuring is accomplished, however, FSA would be on the hook, on average, for only about 13.7% of a claim, with most of the rest going to Commercial Re.

And Commerical Re will be in a strong position to pay any such claim. According to the filing statement, the company will have approximately $446 million on hand to pay any claims that might arise from the $1.54 billion in outstanding exposure it plans to assume. In addition, U S West has agreed to provide a $250 million liquidity agreement to Commercial Re, which can be tapped to pay claims.

The combined commercial real estate portfolios of FSA and Commerical Re would have to suffer losses of more than $700 million before Commercial Re would run out of claims-paying resources.

Under the terms of the agreement with U S West and Tokio Marine, Commercial Re will in essence act as a liquidating company for the 15 commercial real estate transactions FSA plans to transfer to the new company. It will not take on any new exposures, and will remain in existence only as long as it takes for the entire portfolio to mature.

FSA's stock offering, underwritten by Salomon Brothers Inc. and Donaldson, Lufkin & Jenrette Securities Corp., will be used to increase FSA's capital base and to replenish funds used to pay for the corporate restructuring, a press release from FSA says.

FSA also plans to raise its general reserve fund, which is used to pay future potential losses, to $34 million from almost $15 million.

Company officials are barred by SEC regulations from commenting on the stock offering, which market sources speculated would come near the end of the fourth quarter.

U S West, which has previously said it plans to sell its entire 91.6% stake in FSA, would retain between 39.2% and 46.1% of the company after the initial public offering, depending on how much of the offering's over-allotment option is exercised.

Tokio Marine will not sell any shares, but the stock offering will dilute its percentage ownership of the company to 7.5% from its current 8.4% interest.

Public ownership would amount to about 46.3%.

In response to FSA's announcement, Standard & Poor's Corp. released a statement yesterday affirming FSA's AAA rating. The rating agency noted that a $75 million line of credit that FSA maintains with U S West will be canceled after the restructuring and replaced with the new agreements with Commercial Re.

The rating agency said, "S&P believes that the prospect of FSA having to shoulder losses incurred but unpaid by Commercial Re is remote."

Standard & Poor's also noted that the new reinsurance agreement will reduce FSA's net insurance in force to $40.5 billion from $42.8 billion. Qualified statutory capital, as a result, will decline to about $437 million from $490.6 million.

Standard & Poor's said the transfer of FSA's "most volatile" insured business, combined with the capital strength of Commercial Re, means "it is likely that FSA's margin of safety will increase from its current range of between 1.3 times to 1.4 times."

Moody's Investors Service also rates FSA Aaa. Officials there could not be reached for comment late yesterday.

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